Citadel Securities sees rebound as leveraged ETF assets drop 42%

Leveraged ETF assets fell 42% to $154 billion since the end of June, but Citadel Securities says the deleveraging cycle has run its course and systematic buyers are preparing to return as volatility declines.

"The leverage reset has largely run its course, and as volatility comes down, that creates room for systematic strategies to add exposure," Scott Rubner, head of equity derivatives strategy at Citadel Securities, said in a research note.

The firm's data shows August is set to attract renewed buying, with leveraged ETF assets down from $218 billion at the end of June. Semiconductor leveraged ETFs saw the steepest decline, with assets now at about $31 billion. Rubner said breadth is improving and correlations are near historical lows, with investors increasingly willing to pay for upside.

"The next wave of meaningful mechanical flows is likely to be re-leveraging rather than deleveraging," Rubner wrote. Retail investors returned as net buyers on Citadel's platform last week, though they continue purchasing downside protection. The end of earnings season also means the corporate buyback window is reopening, adding another potential source of demand.

Leveraged ETF Contraction Hits Semiconductors Hardest

The leveraged ETF drawdown marks one of the sharpest contractions in the product category's history. Assets under management peaked at $218 billion in late June before the market's deleveraging wave swept through, with semiconductor-focused funds bearing the brunt of the outflows. The sector's leveraged ETF holdings now stand at roughly $31 billion, reflecting the concentrated selling pressure that hit chip stocks during the correction.

The contraction in semiconductor leveraged ETFs is particularly notable given the sector's outsized role in the broader market rally. Chip stocks had been among the primary beneficiaries of the AI-driven equity surge, and their leveraged products attracted significant inflows during the upswing. The subsequent unwind deepened the sector's correction, creating a feedback loop between falling prices and forced selling.

Rubner's assessment suggests the mechanical selling that drove the downturn has largely exhausted itself. Systematic strategies — including volatility-targeting funds, risk-parity portfolios and commodity trading advisors — typically reduce equity exposure when realized volatility spikes. With volatility now declining, these same strategies are ready to reverse course and add risk.

Breadth and Retail Participation Improve

The improving market breadth Rubner cited is a critical signal for systematic buyers. When correlations fall and individual stock dispersion rises, trend-following and momentum strategies find more opportunities to generate returns, making equity exposure more attractive on a risk-adjusted basis. Correlations near historical lows mean stock selection matters more, which typically favors active and systematic strategies over passive index exposure.

Retail participation is also showing signs of life. After weeks of net selling, individual investors turned net buyers on Citadel Securities' platform last week. However, their continued purchase of downside protection suggests lingering caution even as they re-engage with the market. This hedging behavior indicates retail investors are participating but remain wary of another leg down.

The reopening of the corporate buyback window adds another layer of potential support. With earnings season winding down, companies regain the ability to repurchase shares, historically a consistent source of demand during market recoveries. Buyback activity typically picks up in the weeks following earnings reports, providing a steady bid under the market.

The combination of these factors — exhausted leverage, improving breadth, returning retail participation and reopening buybacks — creates what Citadel Securities sees as a favorable setup for a market rebound. The key variable remains volatility: if it stays contained, systematic flows should accelerate; if it spikes again, the re-leveraging thesis would be delayed.

This article is for informational purposes only and does not constitute investment advice.